This is going to be a huge event if this merger does go through the regulators in 2008. What we are about to see a vertical integration. This allows synergies to form within the market. Like stated in the article, the combination of the 'server farms' of both companies will bring about economies of scale which i think even Google will find to match. They can bring down their advertising costs and place predatory prices on their services. This will bring about better services to the consumers.

At the same time, the market which is now a four firm concentration (Google, Yahoo!, MSN and AOL) will be brought down to a three firm concentration, which will lead to a oligopolistic market where the consumer will loose out if the firms collude. Also the three firm concentration will force down economies of scale and this will seal the market from further competion from smaller companies.

So the regulators have a lot of thinking to do before they do give a green light to the deal.

Last year, I was working on an analysis on studying the competitive dynamics in a 3-player environment. The theory was that in any industry, only the top-3 survive as "full-time generalists" (offshoot of game-theory)....now the Internet based services industry had four full time generalists - Google, Yahoo!, MSN and AOL...

When the industry sort of started off in the late '90s, MSN was a clear leader....they bought out hotmail.com in a $400MM, which in those days was counted as a major deal. Microsoft's dominance of the Industry lasted only as long as it took for Google to quickly establish its market leadership.

MSN and others slowly and steadily lost market share to Google and today Microsoft is ready to pay 100 times what it paid for hotmail, a decade back....that was for market leadership and this one, if it happens is a survival tactic...but seems like the theory of 3-player competition is working!

mark1950,
No guts no glory. Sometimes you must put your momey where your mouth is . TIME is of the essence in this life and if you have the money to buy it; get all you can. Wehere there is risk there is reward. These people at Microsoft are not soft in the head. They did not become the world's richest people by luck. Don't forget they are useing stock (Microsofts)as coin of the realm to swing this deal, just as they used it to pay the smartest people in the world to work for them and look what resulted. This is war between Google and Microsoft; do not count Bill Gates as old school quit yet.

I don't believe that combining #2 and #3 will help in the pursuit of #1 in this case. Microsoft may see some benefits from the deal, but nothing worth the price they've paid. This premium is an indication of the the size of the gap that Google has opened up between them.

Google will be rid of one rival and have another saddled with corporate merger.

Even Microsoft has enjoyed a long period of success compared to that of IBM for in stance, this marriage of two distinct cultures, one PC-base, other Internet-based may yet to be seen as a success rather than another AOL fiasco. Stories from Silicon Valley always point to innovation and invention as keys to compete and survive in the brutal markets. So compete by acquisition is not the way to do it.

Money can't buy anything. One thing that I don't think this merger could produce, which is also what Google is most proud of, is the core competitiveness. Basically the model of yahoo! and MSN is just worse than Google's. Microsoft just can't buy anything, especially when it's left behind. Even Microsoft buys 50% of the market, Google can still beat it and grab the share by its superior product.

This will only benefit Yahoo!'s shareholders in the short term. Believe me, Microsoft owning Yahoo! will kill it. If Yahoo has 21% of the search market I expect that to dwindle. Users will follow the "nerds" just as they followed them to Google. If Microsof owns Yahoo! the "nerds" will abandon it, the will flock Google's offerings and to new search offerings such as Wikia's new search: http://alpha.search.wikia.com

Astonishing how much of the markets are short sighted, if not just blind towards innovation. No doubt those with Yahoo! shares are rejoicing today, but it wont last. Why?
A. Microsoft will undoubtedly call the shots in this relationship and only further bloat troubled Yahoo!
B. Many people underestimate, or simply ignore the potential offered by the upcoming Android mobile software. Microsoft, with or without Yahoo, sees mobile handsets as nothing but a fad, hence the consumer apathy to Windows Mobile 6, and no doubt, its predecessor.

I am normally not too sympathetic to microsoft anything and i'm not a big fan of yahoo but to be honest google are becoming a pain as well, I tried calling them a few weeks ago.... try calling Google, a company that size and you can't actually call them, nobody knows how their algorithm works so there is no way to get in tune with good natural search results, that means everybody has to pay rather than make the web an intelligently structured place, money talks i guess... I don't mind seeing Google get peared back a bit anyways.

Microsoft and Yahoo! have very different corporate cultures. Microsoft leverages its web offerings against Windows and other proprietary standards, while Yahoo! has been built on the open source platform.

Mr. Ballmer is fooling himself if he thinks better scaling will help things. It's not just about scaling. It's about offering better or different search results. It's about offering better or different ad solutions.

Yahoo! is a much stronger name in search than MSN (is that a TV network or something?). flickr is popular and I can see a mass defection if Microsoft imposes a Microsoft-only approach. I don't see this merger working out well for Microsoft.

It is scary the size of bet without the clear evidence of a strategy. Too often compoanies who have lost their energy, or originality to change the game resort to the paper solution. Numeric strategies based on synergy savings and the greater clout in the ad market are not big ideas. Normally in my experience they are created by people who really do not get the ad business or that important thing " consumers". This looks at present like a very big elasterplast to cover up the fact that both are struggling to deal with being in the ad business and a market that is driven by consumer preference. Microsoft has built its ad base often off bundling browsers and homepages on PCs. Google has built its audience largely by consumer preference. Its strength and weaknes in the ad business is that consumers default to use Google for serach and the ad $s follow. They could just choose to not go to Google, but someone needs to give thenm a reason. Straegically that is the problem to solve. Belief that bundling two parts of the digital media space in a deal changes that status quo are naive. Sure media buyers will try and leverage. However advertisers get real with the return on their money. They spend it for a reason. If you are in the USA in an economic down turn and search is a key channal to grab the declining sales that are out there... do you really stay away from where 65% already goes? The battle is for consumers preference. To change that you need ideas and not just a cheque book. If either Microsoft or Yahoo has some of those aswell... it really could be interesting.

"The company is also worried that Google�€™s dominance in search and advertising allows it to dictate terms to advertisers, and gives it an unfair advantage over its smaller rivals. This is a bit rich coming from Microsoft, a convicted monopolist in operating-system software, which has also been known to squeeze out smaller competitors"

I agree with this comment. MSFT can't possibly expect the public to look at this deal favorably, let alone its shareholders. I believe such gluttony will trigger more public scrutiny.